Enterprise and Double Cross
Reich, Robert B.
ENTERPRISE AND DOUBLE CROSS At the heart of America's industrial decline is a culture of mistrust by Robert B. Reich In 1985, soon after the Reagan administration arranged quotas on the...
...Gridlock violators seldom suffer directly from their opportunism...
...Commercial dealings are hedged about by ever more elaborate contracts...
...Steel could then have maintained its marketing links to its customers who made cars, buildings, and appliances...
...The workers know that they are now more valuable to the firm than they were before—about $1,500 per employee more valuable...
...Those who get paid for rearranging economic assets, rather than enhancing their value, have a not inconsiderable pecuniary interest in the continued deterioration of commercial trust...
...Had U.S...
...Since the Japanese supplier has already learned to produce the item cheaply while the firm's workforce has not, internal procurement will cost about $1,000 more per worker than buying it outside...
...The decision was irrational only from the standpoint of the American economy as a whole, which otherwise would have benefited from more scientists, engineers, technicians, and production workers trained in the next generation of small-computer technology...
...Its workers, challenged to help save the company, agreed to reduce wages and benefits in exchange for a seat on the board of directors and a chunk of common stock...
...The party that refuses to take part in the game is at a distinct disadvantage...
...By the end of the decade, Zenith had abandoned the effort: production was simply too risky and expensive...
...By the 1980s, this disjuncture between the private and social returns of investment in people was widespread...
...Such stratagems, while rational from the standpoint of the parties involved, absorb time and effort and undermine joint endeavors...
...Self-righteousness is a poor substitute for strategy...
...If the company won't deliver, the workers announce they will simply go to work for a competitor who will pay what the workers are now undeniably worth...
...All over the Valley, the entrepreneurs who had founded the major high-technology companies were being succeeded by second and third generations of entrepreneurs who wanted to found their own...
...Traditional capitalism relies on a lone inventor or entrepreneur to dream up a big idea, investors to provide the capital, managers to translate the idea into rigid production systems, and "drone workers" to man that system...
...parties who once repudiated obligations will find it harder to gain trust in the future...
...the average employee even less...
...Investments in knowledge cannot be protected like investments in real estate or machinery...
...But as each successive group peeled off from the former—carrying away the experience necessary for devising future products—it became ever more difficult to justify the initial investments...
...When Steven Jobs, cofounder of Apple Computer, left the firm to start another—taking with him his cumulative experience and that of several other engineers he brought along—the action reverberated throughout Santa Clara County...
...They balk at participating in new investment without elaborate formal contracts that complicate and constrain retooling efforts...
...It has been just as widely condemned as inefficient...
...faced bankruptcy in 1984...
...American companies have energetically but seldom successfully sued former workers for walking off with hard-won expertise...
...This logic suggested that the only way shareholders could trust corporate executives not to feather their nests at the shareholders' expense was to provide them a prefeathered nest at the shareholders' expense...
...Instead of relying upon a Japanese supplier for a complex component, this executive decides to produce it inside the firm...
...Copyright © 1987 by Robert B. Reich...
...There is a proliferation of work rules, codes, and standards to be followed...
...Similarly, sellers often allocate scarce goods to steady customers when supplies are tight—rather than charge the customers higher prices—to reward and reinforce customer loyalty during downturns...
...Creditors supply capital without requiring a rigid projection of how the funds will be used...
...The market for standard castings is shrinking, as ever more of these end products are produced abroad...
...Relationships would be longer-term, and reputations correspondingly more important...
...No party reaps the return it anticipated when it made its investment...
...They lamented the resulting unemployment of steel workers and the decline of traditional steel towns...
...For many American firms, buying complex parts from the Japanese was more economical than training their own employees to make them precisely because firms could not guarantee themselves any harvest from investing in experience...
...In these games of corporate musical chairs, the underlying production process typically remains unaltered...
...Steel could have eased out of steel and into new alloys and plastics that combine high strength with light weight...
...But if our future prosperity does depend on ongoing learning and collective efforts, then some kind of worker ownership may be an important device for cementing common aims and building trust...
...Owners continuously invest in workers by giving them training and experience in new technologies...
...Requirements and expectations are well-documented in advance...
...Like a university honor code that, once transgressed, is replaced by a book of detailed stipulations, the exploitation of tacit commercial understandings results in a stifling profusion of contractual particulars...
...Consider a company that makes dye castings for automobiles, appliances, and factory machines...
...Three years later, when the South Koreans begin producing precision castings, the firm's new owners realize that to stay competitive they must offer customers still greater value...
...Unionized workers, and not a few liberals, complained that U.S...
...All would have done better by cutting their losses in the first place and refusing to cooperate in the firm's renewal...
...In collective entrepreneurialism, the distinctions between innovator, manager, and worker become blurred and investment becomes a mutual affair...
...American auto makers, for example, were beginning to turn to Japan for ceramic Like jilted lovers, workers and managers become more cautious after they've been burned once...
...A year later, the executive is delighted to discover that his prediction was dead right...
...Each worker would have a direct interest in training his colleagues, rather than jealously guarding expertise lest his own position become less secure...
...When Esmark absorbed Norton Simon, Inc., in 1983, for example, many key Norton Simon executives departed...
...Such arrangements could go far to reduce the appeal of opportunism and increase the perceived advantages of collaboration, and thus lessen the dilemmas that give rise to economic gridlock...
...Rules governing bankruptcies, pension plans, the fiduciary responsibilities of corporate officers, and corporate takeovers, among other transactions, are rendered even more specific...
...Covenants on the new debt limit investment options...
...By that time energy accounted for two-thirds of its revenues and all of its profits, and thousands of workers had lost their jobs...
...Trusting employee ownership The principle is understood by every practicing lawyer, accountant, and investment banker in America: red tape multiplies in parallel with the profusion of finagles it seeks to contain, and vice versa...
...They noted that Sperry would save tens of millions of dollars that it otherwise would have to spend on developing technologies for its next generation of machines—an investment that it could not be sure it would ever recoup...
...Trust-breakers thus stand a good chance of dodging the full consequences of their behavior in part because they outrun them, and in part because the damage is inherently cumulative and systemic...
...They inform the firm's employees that they are expected to continue working at the low wages to which they agreed two years before...
...Collective entrepreneurialism depends on commercial trust...
...This may be seen as an old answer to a new question...
...But this assumption was based upon informal agreements...
...livo years after that, Beatrice, in turn, was taken over by a group of investors that included several former Esmark executives, who promptly dismissed the latest regime...
...And the number and remuneration of lawyers and financial specialists steadily rose through the ups and downs of the real economy...
...No one wants to be a sucker...
...And as fewer investments were made, Silicon Valley began to falter...
...Secure in their place in the organization, they would not need to fear new technologies or endeavors...
...Without the parachute, so the argument went, the executive would be tempted to fight the takeover even if it was in the best interests of the shareholders...
...The implicit promise made to all these parties is that, once the transition is complete, the firm will survive and prosper, and all who depend on it will be better off...
...Suppose the firm's chief executive asks his material supplier to develop an unusual blend of aluminum and silicon, which will be easier to cast into small sizes and intricate shapes...
...Imagine, for example, that the chief executive of an American firm buys the idea of collective entrepreneurialism...
...The erosion of good faith was amply illustrated, for example, by the device of the "golden parachute," which became routine during the merger wave of the early 1980s...
...they strike out on their own...
...Soon thereafter it spent $3.6 billion to purchase Texas Oil and Gas Corporation, on top of the $6 billion it spent a few years before to buy Marathon Oil...
...There is evidence, for example, that employers commonly maintain wages and employment during downturns in the business cycle at higher levels than a strict reading of supply and demand would warrant...
...It would also allow the enterprise more flexibility...
...Those Chrysler workers who survived until the austerity campaign paid off with spectacular gains in profit received only moderate pay increases...
...The maneuver is perfectly understandable from the viewpoint of the first motorists, who thus ensure they will not be the ones trapped by other drivers using the same ploy...
...Other enterprises now experiencing competitive strains followed a similar route...
...Workers who bolt Trust is by no means foreign to American enterprise, of course...
...After figuring out how to make the component themselves, the firm's workers are far more knowledgeable about this area of technology...
...Reciprocal dependencies would be clearer...
...So firms with surpluses in their funds cashed them in, converted the minimum sums to annuities, and kept the surpluses for their shareholders...
...none has any certain recourse in contract law...
...Potential outside investors may suspect the motives and doubt the accountability of worker-owners and refuse to invest in their funds...
...For many Americans a lifetime of work entails relatively few repeat dealings...
...Instead, it opted to import semi-finished slabs from South Korea to feed its West Coast finishing mills...
...Laws are spelled out in greater detail, so that next time no party will be surprised by the opportunistic move of another...
...A year later Esmark itself was acquired by Beatrice Companies, which proceeded to slash Esmark's staff...
...otherwise, it will contract with another supplier at the same price...
...But the employees, suppliers, and other constituents will not be fooled again...
...They announce that because the firm is now so much more efficient, some of the employees will be let go...
...It could have become U.S...
...Mergers and acquisitions remained a favorite sport, and nearly half of all senior executives left their jobs within a year after their companies were taken over...
...Tacit understandings in many companies were breached when they became inconvenient...
...The new management demands a price cut for the hybrid material its supplier developed...
...Tivo years later, the new precision die casting operation earns gratifying returns, and is relatively safe from foreign competition...
...The new group of investors pays for these shares with money borrowed from pension funds and savings and loan companies at relatively high interest rates...
...But two years later, Eastern's board accepted a takeover offer from the Texas Air Corporation...
...Everyone contributed out of fear that the company would lapse into bankruptcy if they did not...
...Such mutual investment extends outside the company as well...
...Indeed, when its purpose is framed this way, it may itself help to overcome some of these problems...
...it generated over nine million tons Robert B. Reich is a professor of political economy and management at Harvard's John E Kennedy School of Government...
...Managers who sell out The risk of exploitation runs the other way as well...
...Each participant, knowing this and wary of being victimized, forswears trusting collaboration...
...Manville had spent $9 million over seven years to gain that expertise...
...Thus when the Sperry Corporation announced in 1985 that it would stop making its own small computers and begin to rely on Hitachi for the computers it sold under the Sperry name, investment analysts welcomed the news...
...They make it far more difficult for enterprises to shift and evolve in response to the new commercial opportunities...
...When they found one, they offered shareholders a premium over the market price of the shares...
...engines and carbon-fiber chassis...
...The ensuing political debate centered, predictably, on the benefits and the pains of economic change...
...And all worker-owners, if most of their wealth is tied up in the firm, bear more risk than if each owned a diversified portfolio of investments...
...The probability that others may try to exploit a relationship inspires a widespread resolve to be the exploiter rather than the exploitee...
...Suppliers of materials and parts invest by committing to produce specialized components...
...Eastern Airlines American companies have taken to suing former workers for walking off with expertise...
...Managers who feel exploited by departing employees are less forthcoming with subsequent employees...
...It was not uncommon to throw a goodbye dinner for a key employee one night, and then serve legal papers on him the next morning...
...But there is a problem...
...In Japan such an investment was worth its price because engineers could be expected to spend their lifetimes with the firm...
...Steel or for the many other American companies who cling to the logic of standardized mass production and balk at a strategy of collective entrepreneurialism...
...They reduce the system's capacity to generate wealth...
...Texas Air's chairman was notorious with labor for a ploy he pulled off with an earlier acquisition: after buying Continental Airlines he had filed for bankruptcy, which let him repudiate union contracts, lay off two-thirds of the labor force, and cut wages by half...
...Like jilted lovers, these parties are far more cautious next time...
...Yet neither Zenith nor U.S...
...Notoriety has its costs...
...The future looks so bright, in fact, that the firm is acquired by a group of investors who offer the firm's shareholders a hefty premium over the current market price of their shares...
...This is especially likely in a highly mobile, anonymous society...
...Workers invest in the overall enterprise by moderating their wage demands...
...It may be sufficiently promising as such a device to warrant considerable efforts to overcome its inherent problems...
...He decides to invest in the production experience of the firm's workers...
...Or it could have moved into advanced ceramics that resist corrosion and heat, or into any number of other new materials that do what steel does, but better or cheaper...
...Zenith, likewise, could have regarded the laser disk not just as one potential product but as the wellspring of a stream of products flowing out of the collective experience gained by making the first—items like optical computer memories, disks containing information services, video disks that could be erased and revised...
...Loyalty has its own economic value...
...Employees would themselves reap the benefits of effort and innovation...
...By 1985, the average corporate manager stayed put for 4.5 years...
...Individuals are not bound by ties of loyalty...
...It should come as no surprise that the contract-bound organization proves incapable of the sort of quick, creative responses to customer needs that would keep it competitive...
...These "hidden handshakes," as the economist Arthur M. Okun has called them, help explain why wages and prices do not move smoothly up and down with the overall economy...
...Those who renege on informal promises and understandings surely bear a burden: they must live with a sullied reputation...
...Pohang's workers earned an average of $2.50 per hour, or about a tenth of U.S...
...Workers would monitor each other as well as their managers, to guard against lapses of judgment or diligence...
...There, the myth of the individual entrepreneur is less rooted than that of the loyal teammate...
...Even if each member of a common endeavor stands to gain from a policy of trust, the perception that any one member can do even better by exploiting the others' trust tends to undermine the policy...
...Neither of these explanations holds, however, either for Zenith and U.S...
...His reputation for solid investments earns the firm's bonds a good rating, and creditors put up a new issue despite its unspectacular interest rate...
...Honing their firm-specific skills instead of basic skills that could be peddled anywhere would be a less risky strategy...
...This systemic erosion of trust precipitates all manner of precautions...
...Similarly, in a context of suspicion and opportunism, information is transformed from a tool to a weapon...
...Steel's pay scale...
...They can see all sorts of ways to apply their hardwon expertise to new products and to improvements of existing product lines...
...The new owners have, in effect, expropriated the benefits that were to go to these parties under the tacit agreements made with the former chief executive...
...When drivers going north and south opportunistically crowd into an intersection as the light turns red, they block the drivers moving east and west from going through on the green light...
...Workers invest in one another by sharing ideas and insights...
...Excerpted from Tales of a New America by Robert B Reich...
...Advanced Materials—a robust descendant of its former self...
...But he sadly vows that from now on he'll buy advanced components from Japan...
...This vision of collective entrepreneurialism should not seem unfamiliar...
...Thus the largest beneficiaries of the sacrifices were Chrysler's managers, who enjoyed magnificent bonuses, and its investors, whose shareholdings increased substantially in value as the firm recovered...
...One possible approach to this problem is to encourage versions of worker ownership...
...Nor were shareholders immune from exploitation by the stewards of their wealth, corporate managers...
...What are we to conclude from this...
...Suppliers or workers who are mistreated by one set of managers do not make the same mistake again when they deal with a different set...
...Employee ownership has been widely advocated on largely ideological grounds...
...The Chrysler Corporation, for example, received concessions from employees, suppliers, bank creditors, and the government during its near collapse in 1979 and 1980...
...Their caution is shared by others who, although they have had no direct experience of being exploited, learn by observation to keep their guard up...
...Our enlightened executive has no choice but to accede to their demands, even though it wipes out the gain from his investment...
...The company's creditors get the news via the bond market: the firm's additional indebtedness has substantially increased the risk of eventual default and reduced the value of the bonds...
...It induces collective gridlock...
...The reason for this defection from economic theory is due to employers' eagerness to maintain workers' loyalty, lest employees depart during upturns in the cycle...
...The city gets a similar message: more tax abatements, or the firm decamps to another city...
...It seems doubtful that Chrysler workers would willingly sacrifice again...
...So the initial $1,000 investment—with a 50 percent return—is well worth it, and the company opts for internal production of the component...
...Corporations themselves changed hands at a rapid pace—often altering their names, locations, and images in the process...
...In mid-1986 it dropped "steel" out of its name and became USX, the last letter serving as an indelible reminder that what the corporation now stood for was unknown and unknowable...
...What would become of Apples shareholders and other employees who had relied on the expertise of Jobs and the defecting engineers...
...By the end, the firm employed one-third fewer people than it had at the start, and many of the cars it sold were being made in Japan...
...Rather than attaching solely to the offending person or firm, the effects are likely to be diffused—resulting in general reduction of trust in all commercial dealings...
...of steel a year...
...In the mid-1980s, even California's famed Silicon Valley was embroiled in such litigation...
...Every new thrust invites a more sophisticated parry, requiring an ever larger number of lawyers, accountants, and financial advisers to execute it...
...The problem is rooted in a deeper dilemma: a simple lack of trust within American business culture...
...Because no one can be sure that someone else might not violate a trust, everyone takes precautions...
...By the mid-1980s corporate raiders were on the prowl for firms that had not yet exploited this easy source of cash...
...On the other hand, conservatives pointed out correctly, there was no future in making basic steel...
...the pension plans did not stipulate precisely what would be done with any surpluses...
...These loans are secured by the value of the firm's assets...
...But the cumulative effect of such behavior is to ensnarl traffic, and the greater the pressure on the traffic system, the more tightly gridlock takes hold...
...Employees assumed they would receive any surpluses that might accumulate in their pension fund investment portfolios, over and above minimum sums required to be paid out to them as pensions...
...enforcement procedures are minutely delineated...
...The business pages of the morning paper offer continuous news of novel ploys and counter-ploys of paper entreprenuers seeking to outmaneuver one another...
...Employees sue managers, shareholders sue directors, creditors sue those who audited the corporate books, everyone sues the companies that insure everyone against liability...
...Reputations, like unpaid bills, often cannot keep up with those who move quickly...
...Reciprocal rights and obligations are codified in ever more voluminous detail...
...He asks his employees to forgo wage increases for the next two years, so that the firm has enough cash to pay for the new molds and computers it will need...
...Steel Corporation dropped plans for new investment in a Utah facility...
...In this way, the opportunistic behavior of a relative few reduces the flexibility of the entire system...
...the average chief executive, 4 years...
...The firm's capacity to innovate, adapt, and improve will be expanded...
...In this way, Zenith too could have evolved as its work force, and its surrounding network of suppliers and customers, also evolved...
...Sony, meanwhile, introduced the first successful mini-sized, laser-operated compact disk player, which swept the American market...
...When sacrifices were needed to make it through lean times or develop new products or processes, worker-owners would be more ready to accept austerity, knowing they would reap the eventual rewards and not be shouldered aside once they had made their contributions...
...In Silicon Valley, it was not uncommon to throw a goodbye dinner for a key employee one night and then serve legal papers on him the next morning...
...A direct ownership stake can go a long way toward generating a sense of collective responsibility...
...This dilemma explains, in part, why American companies have so often entered joint ventures with their Japanese counterparts...
...South Korea's Pohang Iron and Steel Company, for instance, operated one of the most modern mills in the world...
...On the opposite end of the industrial spectrum, the Zenith Corporation invested several hundred million dollars in the 1970s trying to implement a potentially revolutionary idea: using lasers to play sounds recorded on a plastic disk...
...The American economy in transition generates countless opportunities for mutual endeavor and joint gains, but at the same time countless invitations to opportunism...
...These are just the sort of feelgood management ideas that fill the bookstores and business schools...
...Why go to the expense of giving your design and production engineers such valuable experience if, as studies show, almost half of them will leave the firm within two years...
...Both U.S...
...Withholding technical and economic data that, if shared, could boost joint productivity can be the only logical strategy for individuals who have learned to distrust their co-workers and managers...
...Zenith opted instead to import videocassette recorders—a comparable but simpler technology—to sell under its own brand name...
...They prepare a plan to incorporate customized services into the product—milling, drilling, plating, trimming, and finishing the precision casts according to the customer's special needs...
...One possibility is that the notions of collective entrepreneurialism are pipedreams, and that the only realistic options for most American workers are protection, idleness, or wages as low as their competition abroad...
...But our enlightened executive looks upon this added expense as an investment in his firm's workers...
...No one wants to be a sucker...
...The lasers would "read" information encoded and compactly stored on the disk and reproduce sounds far more faithfully than conventional tapes or records...
...The point is that some form of employee ownership and control could provide a superior context for forging joint commitment and fostering trust...
...This was a generous severance payment, often totaling a large multiple of the executive's annual salary and bonus, which was awarded—the parachute automatically opened, as it were—when a takeover became successful...
...Steel moved in this direction, it could have retrained many of its workers, already skilled in making one kind of durable material, to meet the same needs with new products...
...But these consequences may be more than balanced by the onetime gains of exploitation...
...Steel was abandoning steel, and so it was...
...Collective gridlock ensues when trust breaks down...
...Shareholders are more meticulous in their choice of firm...
...Next time, Manville (and others like it) would be more reluctant to make such large investments...
...The future lies in doing precision casts for computer parts and missile components, a process requiring substantial collective investment...
...the slacker and exploiter would bear the burden of their actions...
...Pursuing these options, however, would have required a fundamentally different approach to capitalism: collective entrepreneurialism...
...Guardian was selling its own brand in just 18 months...
...The manager estimates that the total present value of this learning will come to about $1,500 per worker...
...In most of these areas, no foreign producer was yet ready to compete...
...Used with permission of Times Books, a division of Random House, Inc...
...Thus the system's evolution is stymied...
...As contractual refinements progress, litigation over them also escalates, for each party feels compelled to contest adverse interpretations of the ever more convoluted contracts and rules...
...If there were nothing to the notion of collective entrepreneurialism, if productive organizations were simply the sum of their fungible parts, it may well be that worker ownership would be a bad idea...
...Supplier, workers, creditors, and city officials go along...
...In principle, however, each had other options...
...Steel followed any such path...
...Investors can assert and defend their stakes in tangible assets, but not in value that resides in peoples' minds...
...He asks the towns and cities in which the firm's factories are located to reduce the firm's tax bill to free up funds for retooling...
...When it comes time for the salary talks, each worker demands a raise worth, say, $1,499...
...city driving is a sufficiently anonymous activity that they are likely to get through with their reputations intact...
...The virtues of employee ownership would not be solely motivational...
...A culture of opportunistic individualism aborts collective entrepreneurialism...
...When is it economically rational to violate a trust...
...Taking immediate advantage of ambiguities in contracts and rules, for example, makes eminent sense when the other party, given a chance, can be expected to twist them to serve its own purposes...
...Different groups of employees—like younger and older workers—will often have different interests in immediate wages and dividends versus long-term growth, for example...
...Steel and Zenith were simply too dim to spot the sources of future profits...
...Employees who abandon a firm after gaining valuable experience, managers who abandon suppliers and employees after gaining concessions, managers who feather their nests at shareholders' expense—all must live with the long-term consequences of their one-time gains...
...To the extent our place in the world economy is determined by our success at collective endeavors, the central problem of economic policy is how to create the kinds of organizations in which people can pool their efforts, insights, and enthusiasm without fear of exploitation...
...He figures that once his workers master the challenge of making this one component, they will be better equipped for further innovations...
...Another possibility is that the managements of U.S...
...Talented and diligent workers risk being exploited by the incompetent and lazy...
...The telling point is the justification invoked: the protected executives suggested such insurance was essential to preserve their impartial judgment about unfriendly takeover bids...
...Each participant insists that every obligation be spelled out in advance, every contingency be clearly described...
...Collective entrepreneurialism becomes impossible...
...It is simply too expensive for employers to find and train good employees with every up and down in the economy...
...Between 1970 and 1985, the yearly total of private contractual disputes brought before federal courts tripled to 35,400...
...The chief executive who orchestrated the retooling promptly resigns, and the new group takes over the management of the firm...
...Steel and Zenith made rational calculations of the cost of pursuing a market and, following the logic of standardized mass production, opted out...
...Trust is a brittle organizational adhesive, however...
...But Chrysler continued to close plants and lay off workers...
...When Guardian Industries wanted to get into the fiberglass insulation business, it simply hired away six Manville Corporation employees who knew all about how to produce the material...
...ENTERPRISE AND DOUBLE CROSS At the heart of America's industrial decline is a culture of mistrust by Robert B. Reich In 1985, soon after the Reagan administration arranged quotas on the importation of foreign steel, the U.S...
...The typical American curriculum vitae records an unattached self who advances from job to job, organization to organization, place to place—as horizontally mobile as upwardly...
...This story, too, has been replayed across America...
Vol. 18 • January 1987 • No. 12
